How does political risk affect international business?

Politics often interferes with business; more so with regards to international business where interests of more than one country are involved. While doing business internationally presents vast opportunities and opens up new markets, risks become higher. Political realities are hard to predict, but effects are well-known- - shutdown of all operations or substantial material losses. Although every big international company has a risk management strategy, often one for every country it has operations in, political risk is still a major problem.

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Definitions

There are several popular definitions of political risk for international business. Bremmer defines political risk as "the impact of politics on the market"; Alon and Harbert define it as political processes and events that can have negative effects on international business; according to Jacobsen, political risk is events, processes, and socio-political realities of a country which can impair international business interest.

Who is affected?

Companies doing business internationally risk their property, products, and people in case of a violent conflict. In fact, realisation of potential risk is a major deterrent for companies thinking about entering a new country.

Types

There are several major types of political risk: 1) general political instability--companies know in advance of current instabilities and can minimise risks; 2) ownership risk--government takeover in politically unstable countries; 3) operations risk--government can enforce discriminatory regulations against foreign companies to impede their business; 4) transfer risk--governments can stop transfer of money earned on their territory in what is called repatriation of earnings.

Example

In 2006 Bolivian President Evo Morales started the process of nationalisation of foreign-owned oil companies. Before this process, Bolivia experienced one of the most violent public unrests in its history. The nationalisation resulted in material loss for foreign companies and led to deterioration of relations between a few Western countries and Bolivia.

Risk management

Because potential damages can be tremendous, companies spend a lot of time and money on designing appropriate risk management strategies for the countries they intend to do business in. Of course, these strategies are mostly good against general political instabilities but can also work against other types of risks as well.

Political risk in the UK

According to the 2013 global political risk index prepared by Maplecroft, the level of political risk in the United Kingdom is low. Moreover, the UK is ranked 7 globally in the World Bank ease of doing business ratings. These facts combined, make the UK a good place for foreigners to make investments.